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Massachusetts Treasurer Sees 8% Pension Gains Shunned by Calpers

Reductions of investment assumptions sparks discussion

Aug. 10 (Bloomberg) -- Massachusetts Treasurer Steven Grossman wants to reduce the assumed rate of return on the state’s $50 billion in pension-fund assets, currently at 8.25 percent and among the highest for U.S. public retirement plans.

Grossman, a former Democratic National Committee chairman, said he’s gathering legislative support for a cut to 8 percent, with an option to go lower. That would put Massachusetts more in line with other states, yet the move would cost taxpayers and covered workers $1.7 billion to maintain funding commitments.

“I will predict right now with a fair degree of confidence that we will be using the 8 percent number for our expected return,” Grossman, 66, said in an interview. The rate is set by law, and the earliest it could be changed would be next year.

More than a third of 126 state and municipal pensions, including the California Public Employees’ Retirement System, the largest with $238.5 billion in assets, have cut investment assumptions since 2008 as returns have lagged behind historical averages, according to the Public Fund Survey. Wilshire Associates said this week that the median return for public systems was 1.15 percent for fiscal 2012 as the European debt crisis and a slowing global economy curbed equity gains.

While a lower rate of return may better reflect current market trends, the change may stir controversy. It can increase the Massachusetts system’s unfunded liability, or the difference between projected assets and amounts owed to beneficiaries, pegged at about $19 billion in January 2011. A lower return assumption can also force higher contributions from the state, cities and workers to meet funding commitments.

Confidence Booster

“Whatever increase in our unfunded liability is more than made up for by the increased confidence from the rating agencies and investment community in our willingness to reflect reality and common sense,” Grossman said of the change he’s seeking. The state plans to fully fund its retirement plan by 2040.

“In the wake of the big market downturn in 2008 there’s a new-found appreciation for volatility,” said David Driscoll, the national head of public-sector services at Buck Consultants in Boston. “That’s fundamentally what people are trying to avoid,” he said, calling it one of the “consequences of negative surprises.”

Massachusetts is one of nine retirement systems, out of 126 tracked by the Public Fund Survey, that assume investment earnings of 8.25 percent a year. Most, 44, forecast 8 percent. More than half, 68, project less than 8 percent.

Indiana’s 6.75%

Indiana’s retirement system this month cut its assumed rate of return to 6.75 percent from 7 percent, the lowest of the funds tracked in the survey, said Keith Brainard, research director at the National Association of State Retirement Administrators, which conducted the study.

The Massachusetts pension holds more stocks and fewer bonds than most others, which is why it assumes a higher rate of return, said Grossman, who was elected treasurer in 2010. During the past decade, the fund’s average annual return has exceeded 7 percent, he said.

However, in the 12 months through June, the state fund lost 0.08 percent on invested assets, hurt by weak equity market performance, Grossman said. For that period, the Standard & Poor’s 500 Index of U.S. shares gained 3.1 percent. In the previous fiscal year, the system earned a 22 percent return.

The state pension board, led by Grossman, meets today in Boston to discuss investment returns for the past fiscal year. It is also set to consider matters including whether to place assets with Steadfast Capital Management, a hedge fund.

Traditional Pensions

Like most public plans, government workers and teachers in Massachusetts are covered by a defined-benefit package. They don’t contribute to Social Security and don’t get credit from the federal agency for their time on government payrolls.

Massachusetts’s unfunded liability stems partly from the market collapse in 2008 and partly from its failure to begin setting aside money for retirees until the 1990s, according to the Massachusetts Budget and Policy Center. While workers contribute as much as 12 percent of their salaries, the state put in $1.4 billion in fiscal 2011, or about 4.3 percent of its budget, according to the group.

Grossman, who hasn’t ruled out a 2014 run for governor, said that the increased taxpayer cost of a lower return assumption would be partly offset by a reduced growth rate for government salaries. He said Governor Deval Patrick, a Democrat who plans to step down when his current term ends, supports cutting the return assumption, as do legislative leaders.

An Outlier

“It has been fairly clear to most of the key players in this discussion that an eight-and-a-quarter return was too high and made Massachusetts a bit of an outlier,” Grossman said.

Jay Gonzalez, the governor’s secretary of administration and finance, supports a change to 8 percent, according to Alex Zaroulis, a spokeswoman. How and when a cut may be implemented haven’t been determined, she said by e-mail.

Seth Gitell, a spokesman for House Speaker Robert DeLeo, a Winthrop Democrat, declined to comment on a rate reduction.

A drop to 8 percent doesn’t go far enough, according to Jim Stergios, the executive director of the Pioneer Institute, a nonprofit policy research group in Boston, although he supports the reduction. He said Massachusetts should follow the lead of states such as Rhode Island that introduced 401(k)-like defined contribution plans as a way to cover its unfunded liabilities.

“If this is a first step, that’s absolutely wonderful, but we actually need to do a lot more,” Stergios said.

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